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Walked on corn contract
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84TURBOGN
Posted 3/14/2008 09:24 (#333734 - in reply to #333604)
Subject: RE: I don't think that has anything to do with it


Pete and Plowboy; Good discussion. Wish this could be a sticky.

Farmers walking away is not the whole reason for the basis only bids. It is a part of it, not the ones that walked but the potential that that can happen. many grain contracts have in the fine print "subject to NGFA rules" Many farmers do not know what those are. Also, what some elevators are finding out that the contract must state NGFA rules and settled by an NGFA arrbitrator. If not they follow NGFA rules in court. Log on to NGFA and look at some of the cases.

As far as the county elevator's. Most hedge with futures. This provides the most flexability and provides good competitive bids. The other way to hedge is with offsetting the purchased grain with another cash sale to a buyer. Each are a hedge, just a different way. The futures hedge gives the local buyer the ability to buy at a wider basis, hedge w/ futures and sell when the basis improves or when the market needs grain. Yes you can do that with "hta's" but then the enduser or termanil pretty much knows what he has for grain comming at him. The use of futures by the local elevators keeps the big boys guessing as to what "basis" levels are needed to get grain to move. Also if futures are used, and the spreads widen as the elevator I can roll the hedge out or the enduser needs to pay up to get the grain, by increasing the basis. As an elevator once I hedge with futures all I care about is the basis. If I bought corn from you at -30 the K and futures are lets say $3.00 at the time. The "enduser" has a bid of -2 under and it cost me 15 cents to get it there. I could sell it to them and make 13 cents. However there is carry in the market so I hedge with futures at $3.00. Now th board rallies to $5.00 and the basis goes from -2 to +25. I then sell to the enduser at +25. Now what happens is we "exchange" futures. I have shorts so the give me futures and I take. THis wipes out my short and the contract is priced at the "exchange price + or- basis. In this case we exchanged at $5.00 so the contract price was $5.25. I lost $2.00 on the futures side but make $2.40 on the cash side net of freight. That is Merchandising 101. Buy high and sell low and make money in between.

The situtaion now is many of the endusers/commercials etc are not letting elevators exchange futures until a month or less before the grain is deliverd. In other worrds I as the elevator need to carry the futures. There is added intrest so yes the basis will widen and soon, the under capitalized ones will have to go back to back and the only thing they can "hedge" is the basis. Farmers defaulting now becomes a bigger deal.

When we go to this environment the basis will widen even more. This morning I hear ADM and the Andersons moved thier SRW basis to -2.50 under the July of 08 for new crop wheat. Corn and beans can do the same if volitile enough.

Again, thier contracts need to be solid and yes, if prices crash, and you sold corn to the elevator at $5.30 cash, and that elevator did not hedge, they probably do not have enough $$ to pay you, therefore you could be out of luck. That will hurt worse. All this is why I have the majority of my corn crop hedged with put options.

Again, good discussion
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